The great tax debate

By Allan Chernoff, CNN senior correspondentAugust 6, 2010: 1:06 PM ET

NEW YORK (CNN) -- One of the certainties of life -- taxes -- suddenly is terribly uncertain, and not just for high-earners.

Tax cuts Congress enacted in 2001 and 2003 are scheduled to expire at the end of this year, which for some Americans would push up federal income tax rates. Also at stake are taxes on dividends and capital gains, as well as tax credits and deductions.

Most Democrats and Republicans agree the middle class should not have to face tax hikes. But what about high-earners, families with income above $250,000 and singles above $200,000? Therein lies the battle.

The Obama administration favors allowing the Bush tax cuts to expire for wealthier Americans. Treasury Secretary Timothy Geithner this week argued the Administration plan would raise billions for the government with minimal impact on the economy.

"The top 2% are the least likely to spend those tax cuts, certainly not in comparison to the 98% of Americans who make less than $250,000 per-year," said Geithner.

Members of the Senate Finance Committee met for a planning session two weeks ago. The real work will begin when Congress returns from its summer break in mid-September, though the legislative session is slated to last only a few short weeks before another break in early October for campaigning.

As a basis for negotiations, Finance Committee Chairman Max Baucus, a Democrat, plans to use a bill he introduced last year that would permanently hold steady tax rates for lower- and middle-class Americans.

On the House side, the tax-writing Ways and Means Committee intends to tackle the issue after Senate Finance has finished debate.

Democrats anticipate needing 60 votes to overcome a possible filibuster from Republicans to push through a plan that would retain current tax rates for the middle class while allowing higher rates for wealthier Americans. That will be a challenge. Democratic Sens. Kent Conrad, Ben Nelson and Evan Bayh have said this is no time to be raising taxes, even on the small group of high-earners.

"I support extending the expiring tax cuts for at least a period of time because raising taxes in a weak economy could impair recovery," said Senator Nelson.

As the tax rate deadline ticks, professional tax planners are growing impatient.

And for entrepreneurs who have to worry about both business and personal income taxes, it's added an extra layer of uncertainty on top of the sluggish economy.

New York business owner Ellen Donath says she's won't even consider hiring additional staff, until the issue is resolved because she's unsure of whether more of her company's revenue will have to go for taxes.

"You don't have a clue of what you can do," said Donath, who runs Donath Communications, an advertising, marketing and design firm. "When you know what the rules of the game are, then you can play the game."

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